8. Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfer

Question

8. Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Wren Corporation. Adjusted Basis Fair Market Value Cash $ 10,000 $ 10,000 Building 100,000 160,000 Mortgage payable (secured by the Building & held for 5 years) 120,000 120,000 With respect to this transaction,

a. Tim has a recognized gain because Section 357(b) applies.

b. Tim has no recognized gain because this is a Section 351 transaction.

c. Tim has a recognized gain because Section 357(c) applies

d. Tim has a recognized gain because both Section 357(b) and (c) apply and (b) takes priority.

e. None of the above.

Explanation / Answer

TIm has a recognized gain of $10,000.

Explanation:

TIM should recognize gain to the extent liabilities exceeds the basis of all assets transferred.

Liabilities - Mortgage payable - $120,000

Less: Assets transferred       - $110,000        (Building + Cash = $100,000+$10,000)

Gain                                    - $10,000 (ans)

Wren Corporation's basis in the building will be $100,000 +$10,000 = $110,000

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